Wednesday, October 1, 2008

One year's volatility in two business days and Sept 29 Dow -777

Catching up on the past two weeks:

Back on Thur, Sep 18, around 2:30p EST, the Dow was down about 170 points when rumors floated that the SEC was going to ban naked short selling on financials. The SKF which was at 152 dropped like a stone over the final ninety minutes closing at 112. On Fri, Sep 19, the SEC banned naked short selling for 799 companies. The opening bell saw big 4%-7% spikes higher as short sellers were forced to cover on of all days, options expiration. Although the gap up was faded, most of the shorts trading on shoestring margin accounts got clocked anywhere from 10-20% down.

Over the weekend, the Federal Reserve "put a gun to BAC's head" where BAC massively overpaid a 40% premium to buyout Merrill Lynch at $28/share. The buyout, a 100% stock transaction, temporarily gave long stock holders a reprieve from selling.

Also over the weekend, the last two independent investment banks, GS and MS, asked to be restructured as bank holding companies as GS had dropped to $97 from a high over $240, and MS to $22. This restructuring allowed both access to the FED discount window credit lines and pretty much guaranteed that the "greed is good" profits of the 80s and 90s would be no more.

Secretary of the Treasury Henry Paulson then proposed what is considered the most arrogant 3-page bill to Congress requesting $700 billion to "shoreup the U.S. financial system". One clause of this bailout was that Paulson would have complete decision making over which assets he would purchase and at what prices. All his decisions would NOT be reviewable by any judicial court. In other words, "crown him Emperor Palpatine". The House of Representatives later in the week asked Bernanke and Paulson to speak at the House Banking Committee asking why Americans should give them 1/4 of the federal budget in one swoop and explain why six months ago that on record, they stated "the subprime crisis would have only a small impact on the U.S. financial system, and that the system is fine".

After the close on Sep 24, the Proshares ETF funds posted their capital gains distributions to all its funds, unannounced, noting that it would payout on Sep 30. This had the effect of capping the gains if the markets went in the ETF's direction and also because of the "no short" rule, pretty much made any ETF with a big distribution (SDS and SSO) difficult to trade. So even if the markets moved in your direction, you wouldn't get the full % move in the ETF.

On, Sep 25, Washington Mutual became the 12th US Bank to seek FDIC protection and only a shotgun marriage with JPM (purchasing the deposits and buildings for $1.9 billion saved the uninsured depositors over $100k from a quick writedown to hell). The stock had dropped into the single digits and was in the $2 range due to $17 billion in withdrawals from account holders who correctly feared that WM was insolvent and did not have the credit lines to support a bad loan portfolio.

Over the past weekend, the House of Representatives worked over the weekend, to craft the bailout bill and fortunately to a stunned Wall Street, On Mon, Sep 29, the bill was REJECTED by a 228-206 vote with one voter unassigned. The Dow dropped -777 points, its largest single day drop. On Monday, Sep 30, being the day hedge funds can accept withdrawals from customers, and last day of quarter for window dressing, the Dow recovered 481 points. The Senate is expected to vote on a revised bailout bill including a provision to raise the FDIC protection to $250k per account.

Personally, after getting crushed on Sep 19, we were able to take advantage of Sep 29, and luckily cashed the whole thing out. So now we're 100% cash and thankful for being barely in the black. As I mentioned to others, I want to see how it plays out for a day or two, and maybe I can probe my way back to a position. Essentially, I have two months to make money as I do not intend to take any trades in December to enjoy the holidays.

YTD +.3%

No comments: